China's dairy product market is expected to move up slightly next year from the weak trend in 2015 given signs of recovery on the global dairy market, analysts say. Affected by output rise in major producing countries and slower-than-expected market demand, global whole milk powder prices dropped from a peak of 3,272 US dollars/metric ton (tonne) in February to the lowest of 1,590 US dollars/tonne in August.
The latest global dairy product auction was held on December 15 when dairy prices were quoted at 2,304 US dollars/tonne, lower than 2,307 US dollars/tonne in the first auction this year and also lower than market expectations.
This year, domestic raw milk prices stay at low levels amid faltering demand for dairy products. The market depression is mainly ascribed to heavy de-stocking pressure of homegrown dairy enterprises and increasing use of imported raw materials.
By December 10, average fresh and raw milk prices in China's 10 major cow producing provinces and regions stood at 3.53 yuan/kg, down 7.8 percent from the same time of last year and lower than 3.67 yuan/kg in early January.
In the second half of this year, both Chinese and foreign dairy product brands on the home market started a price war while dairy product prices and sales slowed down obviously. According to statistics from Mental Marketing Dairy Consulting, China's dairy product sales reached 102.4 billion yuan in the first three quarters of this year, up 5 percent year on year, with the growth rate far lower than the same period of last year.
To be specific, only normal temperature yogurt, fresh yogurt and lactobacillus beverage sales saw positive growth while other kinds of dairy products witnessed negative rises. Next year, main factors influencing domestic dairy product prices include supply/demand fundamentals, international milk prices and production cost,.
Industry insiders predict that the sluggish trend of global milk prices will improve next year. John Wilson, executive chairman of Fonterra, earlier forecast that global dairy product prices in the first half of 2016 would go up. He said that global dairy market had already shown signs of slow recovery especially in China where market environment had improved.
Meanwhile, milk glut in many countries started to be relieved following only 1 percent output rises in EU and the US this year. Affected by Nino phenomenon, China's major dairy import source New Zealand saw its milk output fall 4 percent in the new season.
The international market is also likely to face supply decrease in the first quarter of the next year. However, analysts at ANZ Bank are cautious about recovery of global dairy prices. The bank's report points out that that the factors pushing up prices not only include global supply but also recovery of market demand as well as production cost.
But the latter two factors are not likely to increase significantly in the first half of 2016, according to the report. Next year, China's raw milk output is estimated to stay unchanged or edge up 1 percent from the previous year while demand is expected to warm up.
Chen Wei, head of food and agriculture research department of Rabobank, noted that as China starts to implement the policy allowing all couples to have a second child, infant formula powder is likely to contribute 10 percent increment of dairy product demand annually though the policy may not produce an immediate effect on demand and prices.
According to Chen Xin, a dairy expert in Shanghai, against the backdrop of production cost unlikely to rise significantly, raw milk prices will not see an abrupt increase. In dairy cow breeding, the cost of fodder, mainly consisting of soy meal, corn and highland barley, accounts for 60-70 percent of the total breeding cost.
If soy and corn prices fall 20 percent, raw and fresh milk prices will be dragged down by around 10 percent. Industry analysts say that domestic dairy product output falls short of consumer demand by 15-20 percent.
Despite undersupply of dairy products on the domestic market, EU's canceling of milk export quota and the free trade agreements China has signed with several other countries provide a possibility that international dairy products will make up China's dairy demand gap.
In the light of this, China's dairy market supply and demand will gradually be balanced with prices to follow a moderate uptrend.
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